Blockchain 101: Concepts

DECENTRALIZED

As opposed to a centralized system, which is controlled by one governing body, e.g., a central bank (like the Federal Reserve) and the many centralized financial institutions. The central bank controls how fast they wish to print out their currency, thus creating rapid inflation in most cases, while inflation due to newly-minted (mined) cryptocoins is controlled on a decreasing basis. Centralized financial institutions maintain centralized ledgers for which they provide you a statement showing your portion of the activity they have processed. It may even help to think of these centralized parties as “middle men.” To transfer value from User A in Albany, New York to User B in Barcelona, Spain, User A must comply with the regulations and fees as set forth by the intermediary financial institution facilitating the transfer, and perhaps it could take days for a large transaction to clear. In the decentralized blockchain world, User A could send User B the same payment near instantaneously for a fraction of the fees charged by the financial institution.

Public Ledger

A globally accessible shared distributed database, as opposed to a private ledger which is stored on your local computer hard drive or on the hard drive of the financial institution you’ve entrusted with custody of your assets.

Crypto-currency

An open-source digital currency with a unique protocol controlling inflation, and characteristics mutually agreed upon by all nodes maintaining the public ledger. Cryptocoins are traded actively on peer-to-peer exchanges, and that’s where their market value stems from.

A high electricity-consuming computer algorithm process performed by miners to create a hash code which is difficult to produce but easy for others to verify its authenticity.

Proof of Work

Users with sufficient amounts of coins are able to host (“stake”) their coins on a node on the network to facilitate transactions. This process consumes exponentially less energy than proof of work, and provides a miner reward essentially based on probability.

Proof of Stake

The practice and study of techniques for secure communication. As it relates to cryptocurrencies, it’s a hash code (made of alphanumeric characters) unique to a particular transaction.